Proposed Amendments to General Code of Conduct

The Registrar published proposed amendments to the General Code of Conduct for Authorised Financial Services Providers and Representatives, 2003 and proposed amendments to the Specific Code of Conduct for Authorised Financial Services Providers and Representatives conducting Short-term Deposits Business, 2004.

The closing date for comments is 28 February 2018.

The 27 page document provides clarity on a number of interesting aspects of the Code, some of which are discussed below.

RDR related proposals

Enhanced requirements regarding intermediary remuneration

The Registrar proposes enhanced disclosure requirements regarding intermediary remuneration to ensure clients fully understand and agree to fees payable and the services they can expect in exchange for those fees. The current requirement that certain financial interests must be reasonably commensurate with the service being rendered has been expanded to clarify what “reasonably commensurate” entails and to align with both RDR intermediary remuneration principles and proposed amendments to the Regulations to the Long-term and Short-term Insurance Acts in relation to certain types of intermediary remuneration.

Financial interests offered by a provider to its representatives

The General Code currently provides that a provider may not offer financial interests to its representatives for giving preference to the quantity of business secured for the provider “to the exclusion of” the quality of service rendered to clients. Supervisory experience has shown that this requirement is inconsistently interpreted and that many providers are not able to demonstrate what particle measures they have in place to achieve and monitor compliance with the requirement. Amendments are therefore proposed to clarify the Registrar’s expectations in this regard, including the adoption of measurable indicators of the quality of client treatment and compliance with the FAIS Act. This requirement also seeks to support RDR proposal RR, in terms of which the playing fields between incentives for tied and non-tied advice in the insurance sector are to be made more level by strengthening the principle of “Equivalence of Reward”.

Suitability of advice in case of legal or contractual limitations

The General Code (section 8(1)(c)) currently requires identification of a suitable financial product or products “subject to the limitations imposed on the provider under the Act or any contractual arrangement”. Supervisory experience has however shown that, in cases where a provider is legally or contractually limited in relation to the range of products or product suppliers it can offer, the risk of the provider seeking to recommend a potentially unsuitable product in order to “make a sale” is increased. Although such a recommendation would already constitute a contravention of the General Code, an amendment is proposed to avoid any doubt as to the Registrar’s expectations in such situations, by clarifying that where the provider is not able to identify a suitable product, the provider must not recommend a product and must advise the client accordingly.

Clarification that suitability analysis may be tailored to specific circumstances of the client interaction

The Registrar proposes amendments to provide further clarity on the extent to which the depth of information required to be taken into account when performing a suitability analysis before providing advice, may vary depending on the extent of the client’s specific needs and objectives — either as explicitly agreed with the client or as may be reasonably ascertained from surrounding circumstances. This amendment should be seen in the context of RDR Proposal B. Proposal B initially proposed that a framework should be developed for so-called “low advice” distribution models, being models where advice is provided but a full suitability analysis is not required. Based on very mixed comment received, the FSB subsequently advised that two options are being considered: (i) that no formal recognition of a “low advice” model is required and that the FSB should instead clarify that the existing FAIS suitability analysis requirements are sufficiently flexible and scalable to apply in such models; or (ii) to proceed with the development of “simplified advice” standards to apply in specific situations. After further deliberation, the FSB has decided that option (i) above is the preferred approach. The amendments to section 8 of the General Code are proposed in light of this decision. The Registrar will also provide supporting guidance in this regard in due course.

Other interesting proposed amendments to the GCoC

Definition for ‘replacement’

The proposed definition clarifies which types of transactions (including variations) in respect of financial products constitute a replacement. The term `variation’ is also defined for purposes of the aforementioned definition to clarify which types of variations constitute a replacement.

Format of record of advice

An amendment is proposed to enable the Registrar, where appropriate, to prescribe the format and the matters to be addressed in the record of advice. The Registrar is of the view that a prescribed format, in certain circumstances, will improve the quality of the record of advice, will improve compliance and may reduce costs for FSPs.

About Paul Kruger

He is both editor and writer-in-chief of the Moonstone Monitor, the Moonstone Investment Indicators and the Moonstone Online website. After 35 years in financial services, he is as passionate about the industry as he is about sport, wine and music.